New Lows Ahead for Stocks?

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machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
New Lows Ahead for Stocks?

The bear market closing low, to date, was set on 20 Nov 08 at 752.44
on the S&P. The intraday low occurred the following day at 741.02.
In December, I projected a 50/50 chance that the Nov. '08 low would be
retested and broken. While sticking with that view, I'll offer some
details into my thinking.

Seasonally, the months of Nov, Dec and
Jan are the best period of the year for stocks, averaging about a 4.5%
price rise for the 3 months in all years, and about 3.5% in the last
year of a presidential term (as in the 3-month period ending tomorrow). With only one day to go, the return of minus 10.53%
for the past 3 months is the worst ever in the post WW II period, during the usually favorable end-of-term year. The
implication is that heavy downward pressure from economic conditions
completely overrode the positive seasonal tendency.

Now we are
entering the first year of a new presidential term. The first and
second years of presidental terms historically have featured weaker
returns than the third and fourth years. Indeed, the 3 months of Feb,
Mar and Apr of a new presidential term, on average, have achieved a
negative price return. The worst such period ever occurred in early
2001, when the S&P dropped 8.53% during the 3 months from Feb to April. Now it is
exactly 8 years later, and that seasonal tendency is ready to repeat.

If
there is to be a test of the Nov '08 low, the next 3 months would be an
ideal time for it to occur. The seasonal bias is down. We have
unfinished business in the real economy, including the plight of the
auto makers and the banks. If another shoe drops, the low is within
easy reach.

But if the market fails to hit a new low, with all
these negatives in effect, then the possibility of a positive
divergence arises. If all this bad news can't sink the market fairly
promptly, then perhaps enough of the desperate sellers already have
been accommodated.

February is a seasonally weak month. So we
will get some immediate clues, in the next couple of weeks, as to
whether the market is following the bearish script or diverging
positively. For the moment, it's a coin flip.

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